Behind the Curve

Economic nonsense comes a dime a dozen. For example, Federal Reserve Chair Janet Yellen “think(s) we have a healthy economy now.” She even told the University of Michigan’s Ford School of Public Policy so earlier this week. Does she know what she’s talking about?

Somehow, this cartoon never gets old…

If you go by a partial subset of the ‘official’ government statistics, perhaps, it appears she does. The unemployment rate is at 4.5 percent, which is considered full employment. What’s more, inflation is ‘reasonably close’ to the Fed’s 2-percent inflation target. But what does this mean, really?

According to Fed Chair Yellen, it means that now’s the time to tighten up the nation’s monetary policy.

Behold this display of awesomeness, citizen. Doesn’t it prove that central planning “works” after all? Unfortunately the ointment is never entirely fly-free, especially when one is pondering statistical aggregates – click to enlarge.

By now you’ve likely seen this upcoming – choice – quote from Yellen. Nonetheless, we can’t resist repeating its remarkable idiocy. For Yellen, who was in the greater Detroit metropolitan area, was kind enough to humor us all with a nifty automotive analogy to explain how to go about normalizing monetary policy. Here Yellen elaborates with a variety of technical terms:

“Whereas before we had our foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could, now allowing the economy to kind of coast and remain on an even keel – to give it some gas but not so much that we are pressing down hard on the accelerator – that’s a better stance of monetary policy. We want to be ahead of the curve and not behind it.”

As far as we can tell, Yellen’s merely huffing and blowing gas. What curve she wants to stay ahead of is unclear. We assume she’s referring to the inflation curve, although this does seem a bit out of context.

By our account, inflation of the money supply is, indeed, inflation. Hence, the Fed fell behind the curve between September 2008 and December 2014 when it inflated its balance sheet from $905 billion to $4.5 trillion. By our back of the napkin calculation that tallies up to nearly a 400 percent inflation of the Fed’s balance sheet. But what do we know?

The broad true US money supply TMS-2 vs. assets held by the Federal Reserve since the GFC. A few points worth noting: TMS-2 expanded by ~140% between January 2008 and January 2017. One way of looking at this statistic is “in the entire history of the US, an amount X of money was created until early 2008. Since then, the amount of money in the economy has increased by 2.4 times”. The money supply had doubled by November 2014, so it took a little less than six years to print as much money in the US than in its entire preceding history. Yes, this is quite a bit of inflation. The fact that it has “bought” the weakest recovery of the entire post WW2 era is apparently considered a surprise by many people, but it shouldn’t be (the capital theory of the Austrian School provides answers). Also noteworthy: since peaking at ~$12.64 trillion in January 2017, TMS-2 has actually declined by roughly $110 billion. Whether this trend will continue remains to be seen, but if it does, the weak recovery will turn into an outright bust – click to enlarge.

Economic Flatline

Apparently, the Fed is so thrilled with the economy’s health that it wants to start shrinking its balance sheet later this year. In fact, New York Fed President William Dudley wants to execute balance sheet shrinkage by ending reinvestment of maturing principal. Easy come easy go, right?

Unfortunately, Dudley’s plan ain’t gonna be easy. When it comes down to it, it’s unlikely the Fed will ever be able to shrink its balance sheet in any meaningful way. Quite frankly, both the economy and financial markets simply can’t afford it.

Sure Yellen says that “we have a healthy economy now.” However, the economy may not be nearly as healthy as she believes. This becomes much more evident when looking beyond just the unemployment rate.

In particular, as of 4th quarter 2016, GDP is increasing at a lethargic 2.1 percent. Yet that’s not the half of it. As of April 7, the Federal Reserve Bank of Atlanta’s own GDPNow model forecast for real GDP growth in the first quarter of 2017 is just 0.6 percent. By the time you read this they’ll have published an update.

The point is, in the face of 0.6 percent GDP growth, Yellen’s statement that we have a healthy economy is patently absurd. For all practical purposes, 0.6 percent GDP growth is at economic flatline.

Clearly, it’s not the type of growth that will lighten the load of today’s massive public and private debt burden. Nor is it the type of growth that propels first term presidents into a second term in high office.

Fresh from the Atlanta Fed: the latest GDP Now forecast for Q1 2017 stands at a paltry 0.5%. Keep in mind that GDP is a measure of economic activity that leaves a lot to be desired, but as is generally the case with such macroeconomic aggregates, it does give us a rough idea of general growth trends. It remains to be seen if the forecast turns out to be correct, but this particular model has so far worked quite well, so we would not dismiss it.

Hell To Pay

President Trump doesn’t want 0.6 percent GDP growth. He wants 4 percent GDP growth. He demands it. He’s even promised it. But promising something and then delivering on it are two entirely different things. One takes cheap blather. The other takes hard work, persistence, tenacity, and good luck.

Like many of President Trump’s promises, we are certain the promise of 4 percent GDP growth will be broken. But Trump’s only fault in the matter is promising it to begin with. It’s been over 13 years since the U.S. economy had a single year of 4 percent GDP growth. The simple fact is, the U.S. economy’s too larded over with debt and intervention to attain it.

On top of that, Trump has the cards stacked against him. The Fed’s plans to increase the federal funds rate and shrink its balance sheet, either simultaneously or in sequence, will likely be counterproductive to President Trump’s GDP target. As the price of credit becomes more expensive, less borrowing and spending will occur.

Agiant inflationary illusion: total credit market debt, federal debt, stocks and GDP (no points are awarded for guessing what comes dead last). A little aside: the Fed has stopped updating total credit market debt in late 2015. But fear not, the underlying data set keeps being updated. Thanks for nothing guys – now we will have to reconstruct this chart manually if we want to keep publishing it (if we understand this correctly, they simply removed one equation from their spreadsheet – the only effect is to make it more difficult to track, chart and compare this aggregate number. Honni soit qui mal y pense) click to enlarge.

Of course, over the long-term, less borrowing and spending is precisely what the economy and financial markets need. Contracting credit. Deflating asset prices. Bankruptcy and default of marginal businesses. Most of all, default of U.S. government debt. Liquidate it all.

That’s just the federal debt bomb – and it’s less than a third of the total.

These are the solutions to an economy that’s been distorted so far out of balance – where a median income job doesn’t buy a median priced home. This is also the solution to a government that’s gotten too big for its britches. Cutting off the government’s overdrawn credit line will be the surest way to shrink it down to right size.

No doubt, there’s hell to pay for 100 years of ever escalating financial insanity. Take it in stride. The downside is here and it’s not going away any time soon.

Charts by St. Louis Fed, Atlanta Fed

Chart and image captions by PT

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver.
A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

2 Responses to “Hell To Pay”

your first females if you want to rise China’s j 10 jet fighter jet been recently murdered in a collision for the time of an aerobatics work out exercise, assert perform presentation seen from monday.

Yu Xu, 30, A person in the offshore air force’s “september 1st” Aerobatic have company, thrown out of her planes during a training operate involved in the north province connected Hebei during the week, the very tibet time of day magazine supposed.

“among simply four customer aircraft pilots in the nation efficient at driving domestically finished mma fighter jets, the woman’s passing comes as a massive deficit in direction of the chinese language program air make, the global occasions when magazine defined.

Yu, ranging from Chongzhou from your north western state relating to Sichuan, signed up with you see, the some people’s liberation navy (PLA) Air pressure using 2005, says spoken.

your lover managed to graduate brought on by practice four quite a few at some time, one of the first 16 offshore individuals pilots highly trained which can soar killer aircraft, the china’s websites every day said, and in tuly 2012 provides most of the first lady so that it will travel 10. lovers dubbed your loved one their “gold peafowl, your idea said.

this woman went up to become flight squadron alpha dog as well as,while good Global amount of times dreamed to become an astronaut.

Yu became the actual most [url=http://www.love-sites.com/4-secrets-of-chin-doc-to-seducing-a-chinese-woman/]sexy chinese women[/url] two customer players together with the june 1st producers termed to the court founding the best indicate to PLA pictured at China’s a long time ago air in Zhuhai two.

The husband and wife strode with their fighter aeroplanes in about fastening go by means of man [url=http://www.love-sites.com/4-secrets-of-chin-doc-to-seducing-a-chinese-woman/]hot chinese women[/url] pilots, each and every one working out in similar eco-friendly jumpsuits but solar shades.

right at that moment the tiongkok routine classifieds quotation Wang Yan’an, Deputy editor about Aerospace abilities interesting, basically announcing: “female pilots have learned of run off a step ahead jet fighter [url=http://www.love-sites.com/4-secrets-of-chin-doc-to-seducing-a-chinese-woman/]chinese dating sites[/url] jets inside a chinese language program air strength.

“this would mean the air trigger is bound to have diversified the device’s pilot collection and could hire additional woman aircraft pilots,

Yu shown up consistently during this springs indicate to recently, in statements.

the official scoops corporation Xinhua offered Air team spokesman Shen Jinke reporting its office personnel ended up being “intensely regretful and moreover mournful” by visiting the actual woman’s “depressing loss,

The t 10 can be described as workhorse while using japanese air energy source. nearly 400 while using jets occur to be crafted, a great number for the chinese take advantage of, in self defense analysts IHS Janes. this item referred to keep away from studies expressed came forth related to three failures in the earlier three months.

Ah, validity and reliability, the two eternal flies in the ointment of econometrics. I’m sure most economist mean well and can do their share of complex economic modeling, but that assumes the models have any close relationship to reality. Ah, another fly, those pesky devils keep sticking the longer one looks. Perhaps Ms Yellen would be more believable if she imported a few good witch doctors to drive the bad juju from the economy. Can’t hurt and as long as it keeps her from doing anything might even help.

Most read in the last 20 days:

Effects of Monetary Pumping on the Real World
As long time readers know, we are looking at the economy through the lens of Austrian capital and monetary theory (see here for a backgrounder on capital theory and the production structure). In a nutshell: Monetary pumping falsifies interest rate signals by pushing gross market rates below the rate that reflects society-wide time preferences; this distorts relative prices in the economy and sets a boom into motion – which is characterized by...

“Literally On Fire”
This week brought forward more evidence that we are living in a fabricated world. The popular story-line presents a world of pure awesomeness. The common experience, however, falls grossly short.
There are many degrees of awesomeness, up to total awesomeness – which is where we are these days, in the age of total awesomeness, just a short skip away from the Nirvana era. What is Nirvana, you may wonder? We only know for sure that Nirvana is what...

A Useful Public Service
There are nooks and corners in every city where talk is cheap and scandal is honorable. The Alley, in Downtown Los Angeles, is a magical place where shrewd entrepreneurs, shameless salesmen, and downright hucksters coexist in symbiotic disharmony. Fakes, fugazis, and knock-offs galore, pack the roll-up storefronts with sparkle and shimmer.
The Alley in LA – in places such as this, consumers are as a rule well served by applying a little bit of...

Moribund Meandering
Earlier this week, the USD gold price was pushed rather unceremoniously off its perch above the $1300 level, where it had been comfortably ensconced all year after its usual seasonal rally around the turn of the year. For a while it seemed as though the $1,300 level may actually hold, but persistent US dollar strength nixed that idea. Previously many observers (too many?) expected gold to finally break out from its lengthy consolidation pattern, but evidently the...

A Movie We Have Seen Before – Repatriation Effect?
There was a sizable increase in the year-on-year growth rate of the true US money supply TMS-2 between February and March. Note that you would not notice this when looking at the official broad monetary aggregate M2, because the component of TMS-2 responsible for the jump is not included in M2. Let us begin by looking at a chart of the TMS-2 growth rate and its 12-month moving average.
The y/y growth rate of TMS-2...

Waiting for Permanent Backwardation
The price of gold dropped 9 bucks, while that of silver rose 3 cents. Readers often ask us if permanent backwardation (when gold withdraws its bid on the dollar) is still coming. We say it is certain (unless we can avert it by offering interest on gold at large scale). They ask is it imminent, and we think this is with a mixture of fear and longing for a higher gold price.
Lettuce hope this treasure is not cursed... but it probably is....

Shill Alarm
One well-known commentator this week opined about the US health care industry:
“...the system is designed the churn and burn... to push people through the clinics as quickly as possible.
The standard of care now is to prescribe some medication (usually antibiotics) and send people on their way without taking the time to conduct a comprehensive examination.”
From the annals of modern health care... [PT]
Nope. That is not the standard...

In Other Global Markets the “Turn-of-the-Month” Effect Generates Even Bigger Returns than in the US
The “turn-of-the-month” effect is one of the most fascinating stock market phenomena. It describes the fact that price gains primarily tend to occur around the turn of the month. By contrast, the rest of the time around the middle of the month is typically far less profitable for investors.
Good vs. bad seasonal timing... [PT]
The effect has been studied...

Tightening Credit Markets
Daylight extends a little further into the evening with each passing day. Moods ease. Contentment rises. These are some of the many delights the northern hemisphere has to offer this time of year. As summer approaches, and dispositions loosen, something less amiable is happening. Credit markets are tightening. The yield on the 10-Year Treasury note has exceeded 3.12 percent.
A change in pace: yields are actually going somewhere. There is...

Voting with their Feet
A couple of recent articles have once more made the case, at least implicitly, for political decentralization as the only viable path which will begin to solve the seemingly insurmountable political, economic, and social crises which the Western world now faces.
Fracture lines – tax and regulatory competition allows people to “vote with their feet” - and they certainly do. [PT]
In the last few months, over 3,000 millionaires have...

Gold Lending and Arbitrage
There was no rise in the purchasing power of gold this week. The price of gold fell $22, and that of silver $0.19. One question that comes up is why is the fundamental price so far above the market price? Starting in January, the fundamental price began to move up sharply, and the move sustained through the end of April.
1-month LIBOR (London Interbank Offered Rate – the rate at which banks lend euro-dollars to each other). LIBOR and GOFO...

A Truism that is Demonstrably True
Most people are probably aware of the adage “sell in May and go away”. This popular seasonal Wall Street truism implies that the market's performance is far worse in the six summer months than in the six winter months. Numerous studies have been undertaken in this context particularly with respect to US stock markets, and they confirm that the stock market on average exhibits relative weakness in the summer.
Look at the part we...